The most common investment in a self-directed IRA is real estate. Real estate IRA owners who are successful in these ventures reap the benefits of healthy and steady returns on their investments. In America, much of this income is gained through rentals, rehab-and-flipping properties, or buying at a low cost and selling later for a higher profit when demand is high. But, foreign real estate investments in an IRA present unique opportunities, too.
When you use foreign real estate as investments in a self-directed IRA, you add diversity in your portfolio with tangible assets that enjoy tax-sheltered gains. If you use a traditional IRA, you’re not taxed on investment income until you begin taking distributions in retirement. With a Roth IRA, you’ll enjoy tax-free distributions in retirement. Either way, foreign property has the potential to add great value to your retirement savings plan if you invest wisely and make sure to follow rules for IRAs and regulations for investing in foreign countries.
How Do Foreign Real Estate Investments in an IRA Work?
Real estate acquisitions in foreign countries occur very much like they do here in the United States. However, different countries have varying rules and restrictions that affect buying as well as investing. It is critical that you perform exhaustive due diligence to protect yourself and your potential investment.
The rules for American-owned IRAs that invest in foreign property include:
- You and other disqualified persons cannot vacation in IRA-owned property.
- Disqualified persons (including yourself) are prohibited from renting your IRA’s property.
- You and other disqualified persons cannot buy property from or sell property to your IRA.
- You are unable to perform work on property your IRA owns; you must hire 3rd parties to make renovations, repairs, and maintenance duties.
- Learn more about prohibited transactions in IRC 4975.
Ownership, income, and expenses:
- Your IRA owns the investment, and the asset must be titled in your IRA’s name. If the country requires an LLC to invest, the asset must be titled in that entity’s name.
- Income from the asset must be deposited directly into your IRA.
- All expenses incurred from IRA assets must be paid with funds from your IRA.
Additionally, you must be aware of any rules the country you’re investing in may have for owning property in an IRA. Some countries may not allow it. Those that do could have regulations you must be aware of to protect yourself and your retirement account.
While we cannot provide the regulations imposed by every country, we can offer a list of questions to use as a guide when looking into foreign real estate investments.
Six Questions to Ask When Considering Investing in Foreign Real Estate
- Does the country you’re dealing with allow property to be held and titled in the name of your IRA? Do they require you to establish a corporation or LLC in that country to hold the property?
- What is the social / political / ecological environment in the country you are considering? These may be the most critical findings you seek that can positively or negatively affect the success of your investment.
- What are the legal requirements for your moving money into that country? Typically, you must have a bank account in the country you want to own a property in for the purpose of paying expenses as well as depositing capital/income.
- What are the tax requirements regarding foreign property in both the country you’re investing in as well as your own country? Taxes vary from country to country and can be quite complicated. Often, owning foreign property is beneficial to United States citizens, which is why the U.S. has begun to impose more strict laws regarding foreign assets. You must fully educate yourself in this area to avoid any unwanted tax implications down the road.
- Who can you trust to manage your investment property? For instance, if rental properties in Tahiti are your plan—who can you trust implicitly to designate as the person to manage the elements this entails?
- How do you determine real deals from scams? This process can be tricky especially if you aren’t working with someone you know…but, also even when you are working with someone you do know! Some scams are easily identified, others not so much. While a bit of trust is involved in every investment opportunity—performing due diligence in this category is imperative. It means the difference between the life and death of your investment.
Your Takeaway on Foreign Real Estate Investments in Your IRA
The key take-away from this article isn’t the fact that you can invest in foreign real estate with your self-directed IRA. The key is that when you do, it is vitally important that you practice due diligence before you invest. Whether you’re considering investments closer to home and especially in foreign real estate, if you do not spend the time investigating the viability of every aspect of your options, you exponentially increase your risk of failing.
Due diligence is especially essential when considering offshore real estate investments in countries where you know no one, laws differ, and tax implications are complex. Societal, political, and environmental conditions matter. In fact, everything matters so it’s also important that you find a team of trusted advisors from a CPA to a financial expert and even an attorney who practices international law—as well as out-of-the-country counterparts—that can help guide your way to success.
If you have any questions regarding this article or wish to learn more about foreign real estate investments in self-directed IRAs, please contact Advanta IRA today.
Additional reading on due diligence, prohibited IRA transactions, and self-directed accounts:
5 Ways to Perform Due Diligence on Investment Options for Your IRA
Roth IRAs vs Traditional IRAs: A Comparison of the Benefits and the Differences
IRA Rules Part 1: Dealings with Disqualified Persons (Don’t Do It)
IRA Rules Part 2: How to Avoid Prohibited Transactions in an IRA